Hedge: A Greater Safety Net for the Entrepreneurial Age (book review)

With Hedge: A Greater Safety Net for the Entrepreneurial Age, Nicolas Colin has written a much-needed book. In it, he addresses one of the most critical challenges of our time: how to upgrade our social and economic institutions to make the most out of the current technological transformation and spread its benefits as broadly as possible.

Despite what the title might tell, Hedge is much more than a book about the welfare state and how to upgrade it to deal with the externalities of a fast-moving economy. As Nicolas Colin himself makes clear, a Great Safety Net (in capital letters) goes beyond a collection of measures to catch people when they fall off the system. What it means instead, is what Carlota Perez calls a “socio-institutional framework”1: the combination of institutions, social norms, and regulations that define how people, businesses and government interact with each other. Only when this is aligned with the dominant techno-economic paradigm, a society can enter “ a period marked by the redistribution of wealth to the many, the massive creation of jobs, and widespread prosperity”.

At its heart, Hedge is a book about growth or, to say it like Nobel prize Edmund Phelps, “dynamism”2. It offers a clear exposition of why we lost it and what we can do to get it back.

I won’t spend time giving a full summary of the book. I recommend everybody to grab a copy and dig in it. I’d like instead to focus on a few concepts that resonated the most with me.

A jammed growth engine

Opening any newspaper today, we find a worrying consensus about the causes of the current state of crisis: indiscriminate openness to trade, blind faith in technology, and a long series of financial excesses. All this often described as the “natural” outcome of a capitalist system left unchecked. A similar consensus exists around solutions: from the all-out populism of Trump and the recently-formed Italian government to the mild-populism of most socialdemocratic parties around Europe, everybody is promising to reign in the (evil) markets, and to take action to protect those who are squeezed by them.

Hedge takes a refreshingly different approach, rejecting superficial explanations and easy scapegoating. The problem with these observations is that they mistake causes with symptoms: “Tackling finance as the cause of our current problems” - Colin writes - “is like prescribing cough drops to someone who’s suffering from lung cancer.”

The underlying issue - he argues, here again echoing Phelps - is the failure of the techno-economic paradigm founded on industrial mass production and consumption, and of the safety net built around it. In the aftermath of the stagnation of the 60’s, the need to sustain profitability and maximise short-term stakeholder returns pitched businesses against workers, drastically weakening their bargaining power and leading to continued pressure on wages. In the 90’s a new unwritten pact was sealed in which companies maintained prices (and inflation) low by relocating production while low interest rates propped up asset prices and fuelled a credit bonanza aimed at sustaining consumption. The result was a housing and credit bubble of unseen proportion. To say it with Phelps, the slowdown of the industrial economies sent “society into a manic mode leading inevitably to speculative excess.”

The diagnosis is clear: at the heart of our challenges lies our inability to move from an engine that has stopped working to a new one whose promise we don’t seem to be able to grasp. To find a cure, we need to start by addressing a fundamental question: ”Where do prosperity and economic security come from?” The answer Hedge gives points unmistakably to the need of restarting growth and dynamism. These, in turn, are born from the ability to take risks.

In praise of risk

For the economy to grow, create opportunities and deliver on the promise of social mobility, companies and individuals need to be willing - and able - to take risks. This is particularly true in what Hedge calls: “the Entrepreneurial Age”: a techno-economic paradigm that rewards risk-taking disproportionally, even when the effects are painful in the short term.

Never before have individuals and companies been as empowered as they are today to create new products and services. But this comes with some consequences. Businesses that were once sitting comfortably at the top of their markets are now under the constant threat of newcomers. Powerful network effects create winner-takes-all markets where many companies compete knowing that only one will be able to make it. It is understandable that the accelerated pace of Schumpeterian “creative destruction” brings with it uncertainty and leads many people to worry about their future. The alternative, however, is persisting with an economic model that prioritises rent and margin seeking (job destroying) over innovation (job creating). The solution, Colin argues, is not to (try to) slow down the pace of change or to “govern” it, as many western governments suggest. Instead, we must create the conditions that allow everybody to benefit from it, whether they find themselves on the lucky or on the unlucky side of the table.

Putting the accent on the positive qualities of risk-taking can also inform us about the type of safety net we need to build and help us avoid repeating the mistakes of the past. The safety net 1.0 led to the take-off of the economy of mass production and consumption. But over time, its emphasis on job security and its reliance on large firms and large unions became a straight-jacket that institutionalised and froze in time a specific economic model. Today, the remnants of that system - in particular in Europe - achieve the double whammy of blocking innovations that could generate new growth while still leaving uncovered an increasing part of the population.

A new safety for the “Entrepreneurial Age” should work instead at the level of the individual and promote risk-taking rather than containing it. It should also act as an antidote against fear. Fear plays an important role in choosing policies, like protectionism, that end up hurting the same people who demand them. Fear is also at the root of conservative economic choices that try to preserve the status quo (existing companies, existing jobs) at all costs, even when that means killing all incentives to innovation. The absence of a modern safety net plays a big part explaining what Hesge describes as “the tech backlash”: the widespread sentiment against big tech companies which manifests itself, for example, in the frequent protests of taxi license holders against digital platforms like Uber.

In this sense, a safety net is more than a redistributive measure to deal (ex-post) with the externalities of the system; it is a growth enabler that can (ex-ante) allow our economies to be open, stimulate competition and motivate workers to follow new opportunities. And since a well-functioning safety net leads to more jobs, increased security and lower inequality, the better it works, the less you are likely to need it.

The new working class

Another thought-provoking theme in the book is the idea of the urban service class as “the new working class.” It is a strong position on a question that gets mostly avoided by all optimistic views on the future: where will the jobs come from?

In general, the optimist camp is split in two: on one side those who actually believe most jobs will be destroyed, and see basic income as the solution; on the other, those who find it enough to point at the fact that, historically, technological revolutoins have created more jobs than they have destroyed. We just don’t know which jobs these will be.

The question is so important that I think Hedge’s answer could have been worth a more prominent position in the book, or a book of its own. In short, the reasoning is the following: the machines are coming for a lot of routine jobs, industrial ones in particular, but also many lower-skill white collar jobs, like bookkeeper, travel agent and so forth. Professions that have higher task variability, like those delivering proximity services, are more difficult to automate and that’s where most jobs will be created.

The issue is that these jobs have traditionally been some of the least attractive ones. They are not well paid - mostly due to endemic low productivity - and they are typically concentrated in cities, where costs of living - in particular real estate - tend to be very high. For these reasons, a common criticism of the digital economy is that it destroys a lot of good jobs and creates only bad ones in their place.

Rather than accepting this fact, or hiding the problem under the vaguely defined promise of “life-long education”, Colin argues that it’s up to us to turn service jobs into good jobs. Firstly, the occupations from the past which we now call good have nothing intrinsically positive about them. They became good over time, mostly thanks to the achievements of the workers’ movement and to unions. Secondly, some of the elements that qualify the new service jobs as bad - for example, instability - are made so by the lack of modern forms of protection and bargaining power. The establishment of a new safety net as outlined in Hedge will go a long way into fixing that. Finally, instead of fearing the advance of technology also in these sectors, we should embrace it. Only by “augmenting” service workers we can improve productivity, lower their cost and thereby improve accessibility so that the market can be expanded and even more service jobs can be created.

And here is another bold statement which is somehow hidden in the pages. If the new jobs are being created mostly in urban areas, we need to establish the conditions for everyone to move there and exploit the opportunity, rather than keep discussing how to bring jobs back to local communities. Naturally, this point is much more tricky for Europe where, especially in some countries, we have a very different culture of urbanisation. In general, however, it is refreshing to see that someone dares to hint to the fact that if jobs are in cities than maybe it is in cities we should all live (to be fair, Colin never says this explicitly).

The idea of a new working class made of the present (and future) urban service class is particularly important in my view also because it challenges the now too popular narrative of urban elite vs non-urban “common” people. It is true that many wealthy or high paid people live in cities, and they often display liberal (or libertarian) political preferences. At the same time, there is also a large - and growing - segment of people that are the farthest possible from being elite but still share the same values. When media play the “honest blue collar” East England vs the “greedy financial” London, we should remember that the actual majority of people leaving and working in the city are waiters, shop clerks, teachers, nurses, taxi drivers.

Redrawing the boundaries between public and private

When it comes to actual solutions, a red thread throughout the book is the need to redraw the boundary between public and private. Colin is critical about the ability of the state to solve the challenges described above, but he doesn’t believe that the solution lies in a complete withdrawal of government intervention in favour of the private sector. Instead, he moves from an assessment of what each actor is good at - in the context of today’s society - to suggest a new distribution of responsibilities.

Business and occupational licenses are an excellent example of this. One of the state’s primary role in the last century was to redress information asymmetries. The entire system of licenses we have today for taxis, hotels, restaurants and many other services and professions came from the perceived need to protect the weakest party in the relationship - the consumer - from being abused by a much stronger, and more informed, counterpart. Today, this activity is less relevant. Information travels much faster, and the users of a service can help each other through reviews, comments and recommendations. In these sectors, the state’s role as gatekeeper has lost much of its original value, and it has instead become a significant hindrance for innovation.

What Hedge calls for is “a new alliance” between state and entrepreneurs. The latter are clearly better at deploying new technologies to build product and services that address collective problems in a new way. This is visible in the case of urban mobility where the combination of on-demand cars, ride sharing, bike sharing and others similar services leads to the possibility of serving more people, at lower prices and in areas of large towns that were often uneconomical for public transportation or regulated taxies to reach.

State intervention remains instead necessary, according to the author, to stimulate and facilitate these initiatives, as well as stepping in directly in the (very) few areas where entrepreneurial efforts alone are not sufficient. This part reminded me of a definition given by Micheal Hallsworth from the Institute for Government (IFG) where he speaks about the state as a “system steward” creating the conditions in which “interacting agents in the system will adapt towards socially desirable outcomes.”

This new ”map” delimiting the respective responsibilities of public and private actors takes a concrete form in a series of suggestions that Colin puts forward towards the end of the book. A case where the state should retreat from its present role is, as mentioned, that of professional licences where lifting (or at least softening) requirements for performing certain jobs - while in parallel moderating the impact on incumbents - will make it easier for people to shift careers and take up tasks that are more in demand.

Insurance against temporary loss of income is instead an area where a more active role of the state would be beneficial. Here, the combination of a government “mandate” (make it obligatory to contract a certain policy) together with strong provisions to prevent discrimination, would effectively create a new market where private players would compete to provide a form of protection that becomes necessary in the volatile labour market of the “Entrepreneurial Age”.

Finally, an even more direct intervention - the specifics of which remain however quite vague - is argued for in the case of housing, which is one of the most significant hurdles in the way of improving the conditions of proximity services workers.

Exit unions and an individual “Trump” tax

The last section of the book covers a broad range of proposals that could get us closer to a Greater Safety Net 2.0. They span from housing policies to insurance (some of which I have mentioned above), to new ways of achieving collective bargaining and tax salaries. I won’t cite them all individually here. It will be sufficient to say that they all go into the broad directions I have mentioned above: stimulating risk-taking, improving the quality, security and appeal of service jobs and pushing for a better split of tasks between public and private.

A proposal I’d like to single out is that of “exit unions”. In the previous economic paradigm, where employer-employee relationships were long and stable, unions were mostly needed to exercise voice within a company. Their role was to counterbalance the bargaining power of employers, give workers some influence in key strategic choices and, in general, increase the employees’ share of the pie. The entrepreneurial age, on the contrary, is characterised by more volatile labour relationships, a shorter lifespan of employers and in general higher workforce mobility. In this setting, the role of unions shifts to be mostly focused on exit. By this, Colin means the possibility of exercising choice by leaving an employment situation that is no longer attractive to a new one with better potential. To do so, unions will have to take a much broader role when it comes to education (skill development), placement of workers into other jobs, and in general improving and encouraging the mobility and independence of their members. In the platform economy, to pick a topic that is very popular at the moment, an exit union would fight to ensure that reviews and reputation can be ported between platforms, develop tools to benchmark which service offers the best condition and provide advice on how to maximise hourly pay.

A second interesting proposal is the one provocatively named “we should all be taxed like Donald Trump”. In it, Colin suggests that all individuals should be offered the possibility to be taxed as companies. The point here is that we all incur expenses that are related to our career and we should start looking at those as costs that can be detracted from our (gross) income. A similar reform would motivate people to invest more in themselves and would again encourage taking some early risk - and costs - in view a potential future payoff. As things are today, it probably sounds nonsense to most people used to a steady (net) paycheque every month. Colin himself recognises that for such a system to be practical many things should be automated and made easier to manage than they are today. But one thing is sure, to change the way we work we should also be willing to change some of our previous practices, like taxation. And when we do that, we should always keep in mind that the world we inherited today is not millennia old. Income tax was established barely 100 years ago, and nothing says that it should last forever.

The remaining ideas in Hedge shows a similar ambition. It can be said of some of them that they are vague and maybe naive. But the author seems to understand very well the importance of shipping early, even an incomplete (and definitely an imperfect) product. Like me, many will comment and add their point of view. Many others will improve or “fork” Nicolas’ work. This is how software works, why should it not be the case for policy ideas?

Open questions

There is much more in the book, but this review is already getting overly long. I will conclude by highlighting some open questions.

Hedge does a great job offering some fresh and, at times, provoking ideas on how to overcome the current state of crisis by building institutions that can leverage the possibilities of the digital age, and at the same time shield the risks this inevitably involves. Its most significant achievement is showing a way that goes in the opposite direction from the false promises of populists around the world while being much braver and ambitious than what many “moderates” dare to propose.

But while it offers a real chance of solving the problems of tomorrow, it fails to provide convincing answers about those of today. A Greater Safety net 2.0 will definitely do a lot to help a new generation of workers and even those among the present ones who will show the ability to complete the transition. I ask myself whether it does enough, especially on the symbolic plane, to the angry crowds of today. Those that - as Colin also points out - will likely not transition to the service class, will not move to the city, will not learn how to “exit”, but are still numerous enough to move the needle in favour of the populist cause. Something that needs to be worked on is how to convince them to have faith once again in progress, in technology, in expertise. It is a tough job. A much more profound, and worse crisis caused by the failure of the populist politics they find sadly, yet understandably appealing might do the work. I surely hope we won’t have to go all the way there.